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The Generation Gap: How UHNW investors feel about wealth transfer

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How much are HNW families really sharing hopes, fears and expectations? Research has raised flags about effective succession planning and wealth transfer. As a generation of wealthy investors heads …

How much are HNW families really sharing hopes, fears and expectations? Research has raised flags about effective succession planning and wealth transfer. As a generation of wealthy investors heads into retirement over the next 20 years, it's clear that most are better at building wealth than passing it along.

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  • 1. THE GENERATION GAP
  • 2. How much are families really sharing hopes, fears and expectations? It’s the American dream for people to use their abilities and ambition to build a business, rise to the top of their professions and create a lasting legacy for themselves and their families. As evidence, more than 8.4 million U.S. households have a net worth of $1 million or more (not including primary residence.)1 At the “ultra” end of the market, 55,000 individuals hold wealth greater than $30 million each.2 Clearly, the American dream is working for many. Except for the part about building a legacy. New research into the attitudes of ultra-high-net-worth investors has raised flags about effective succession planning and wealth transfer. As a generation of wealthy investors heads into retirement over the next 20 years, it’s clear that most are better at building wealth than passing it along. Conducted in June 2011, the SEI Family Wealth and Succession Survey reveals insights into the attitudes and behaviors of wealthy investors. The survey shows a disconnect between investor expectations and behavior, and highlights a worrisome lack of communication about wealth within the family. Many wealthy individuals hope their financial successes will help their children build a happy life, but privately worry it will squelch work ethic and ambition. Far too many have failed to take steps to protect assets and ensure an orderly transfer to the next generation. The survey captured attitudes about wealth and succession from a representative sample of ultra-high-net-worth investors across the U.S. Their average assets topped $21 million, with an average annual income of more than $800,000. 1 2 S pectrem Affluent Market Insights, 2011. S egmenting the Ultra-Wealthy, Wealth-X, 2010. “ his is a very significant survey because it provides insights T into the beliefs and attitudes of wealthy investors.” – Jeff Ladouceur, Director, SEI Private Wealth Management
  • 3. Pessimistic Expectations When ultra-high-net-worth investors were questioned about the importance of wealth, it was clear that it’s all about family. Maintaining family security, helping children become more successful, and providing a quality education topped the list of goals (see Figure 1). Those goals make sense, but beg a larger question. Why are so many wealthy parents pessimistic about their family’s ability to handle wealth? Only about half of survey respondents said they have faith that the next generation would 51%—Spouse is kept fully involved successfully create wealth andfully informed their lives. The remainder said they 24%—Spouse is kept improve thought their 20%—Spouse is kept somewhat“to some extent” or “not at all.” children would do so informed 8% 8% 5%—No communications with spouse One of the more puzzling results came from a question about whether 32%—Professionals are kept fully involved respondents had “strong expectations” for how family members use inherited 28%—Professionals are kept fully informed 25%—Professionals are split down the middle with 51% saying they wealth. The results were almostkept somewhat informed 15%—No communications with professionals they did not. It’s hard to explain had strong expectations and 49% saying 2%—Children are involved why people have relatively low expectations on a topic they rate as so 15%—Children are kept informed important—other than worrying about interfering in their children’s lives. As 55%—Children know the basics one respondent put it, “Icommunications with children to give people everything they 28%—No don’t think it’s my role 46% 38% Have a pla Have done Have done Other need or think they need. I want to create opportunities—opportunities they can pursue or ignore.” ››Figure 1: Importance of wealth to you 94%—Financial security 50%—Help children become successful 45%—Educate children 35%—Help the less fortunate 31%—Buy the things I really want 29%—Open new opportunities/experiences 24%—Have an impact on personal causes I care about 19%—Leaving a legacy 11%—As a barometer of my success 2%—Allow me to meet interesting people 1%—Increase my social status 3%—Other 18% 3% 38% 5% 7% 29% “ ur children need to be self-driven and O independent. We’re concerned about their attitude of entitlement which is unsustainable.” – wrote one respondent Fulfilling Challeng Uncomfo Liberatin Frustratin Other
  • 4. —Spouse is kept fully involved informed hat informed are kept fully involved e kept fully informed ept somewhat informed ofessionals 5%—Children know the basics ons with children The Communication Gap It’s worth noting that a majority of these investors hope their wealth makes their children happy, yet many worry it won’t. More to the point, they’re not talking about it with their children. Survey results show the wealth generator in the family regularly confers with his or her spouse, and to some extent, their financial professional. But they rarely talk to their children, even when grown (see Figure 2). ››Figure 2: Communication around decision-making 51%—Spouse is kept fully involved 24%—Spouse is kept fully informed 20%—Spouse is kept somewhat informed 5%—No communications with spouse 32%—Professionals are kept fully involved 28%—Professionals are kept fully informed 25%—Professionals are kept somewhat informed 15%—No communications with professionals 2%—Children are involved 15%—Children are kept informed 55%—Children know the basics 28%—No communications with children 46% 38% For example, 51% said their spouses are “fully involved” in financial decisions, while 24% keep spouses “fully informed.” Children, on the other hand, aren’t 8% in the loop. Only 2% are involved in making decisions and 15% are simply kept 8% informed. The largest group (55%) “know theplan in place while 28% have had no basics,” Have a 94%—Financial security communications. Have done minimal preparation 46% 50%—Help children become successful Have done nothing so far 45%—Educate children When communication does take place, Other it’s usually informal, described in the 38% 35%—Help the less fortunate survey as “general family conversations,” as opposed to structured “family 31%—Buy the things I really want meetings,” or “guided sit-downs with professionals.” 29%—Open new opportunities/experiences It’s apparent 24%—Have an impacttalk about wealth because the conversation is families fail to on personal causes I care about 19%—Leaving a legacy often less than satisfying. It ranks among politics and religion as subjects to 11%—As a barometer of my success avoid. Only 38% percent of respondents described conversations about money 2%—Allow me to meet interesting people with family members as “fulfilling.” A similar number (39%) of respondents 1%—Increase my social status were far less glowing, describing the experience alternately as “challenging,” 3%—Other “uncomfortable,” or “frustrating” (see Figure 3). ››Figure 3: Feeling when involving family members 94%—Financial security become successful e want /experiences al causes I care about 8% 8% 18% 3% 38% 5% 7% 29% Fulfilling Challenging Uncomfortable Liberating Frustrating Other 18% 3% 38% 5% 7% 29%
  • 5. “ here’s nothing more important than providing T roots and wings for my children—whether there is wealth or not. That being said, having some wealth to pass down is a blessing.” – a respondent wrote Hopes and Fears Regardless of expectations, a vast majority of respondents said their greatest hopes were that their wealth helps to “increase the overall happiness within the family,” and that their children would “follow their dreams regardless of financial implications.” Planning Wealth Transfer It’s reasonable to assume that a lack of communication suggests a lack of planning. Here, the results are mixed. Forty-six percent of respondents said they “have a full wealth transfer plan in place,” 38% “have prepared nothing more than a will,” and 8% said they “have done nothing so far” (see Figure 4). ››Figure 4: A closer look: your wealth transfer plan fully involved volved med formed now the basics n 8% 8% 46% 38% Have a plan in place Have done minimal preparation Have done nothing so far Other
  • 6. The Bottom Line What’s the message from this survey? Clearly, there is work to do. Whether someone acquired wealth building a business or climbing the corporate ladder, he or she got there with hefty doses of smarts, drive and guile. Those same attributes can be applied to transferring wealth. The process should start with articulating realistic expectations and then sharing them with the family. Expectations are rarely met when not communicated. Is the plan for the children to take over the family business? Or would Mom and Dad prefer their children follow their own paths? Regardless, wealth owners need to come to peace with that decision, declare it and share it with their families. It’s natural for people to worry about the possible negative impact of wealth on their children. They fear too much wealth will deflate a child’s drive. It’s not unheard of for the promise of wealth to make the next generation irresponsible and overly dependent. Those concerns should be articulated. They are legitimate fears, and not easy to talk about. The key is to strike a balance between supporting the children without stifling their work ethic. As one respondent said, “Too much wealth transfer can decrease motivation but I prefer that my children have less financial stress than I did.” Finally, for most multi-millionaires, a simple will, by itself, is insufficient for wealth transfer purposes. Clearly, many investors are doing things right, but the fact that more than a third of respondents have a will as their only wealth succession tool, and 8% have taken no steps to formally transfer their wealth, is disturbing. A lot of money—and family happiness—is unnecessarily at risk.
  • 7. Based on the survey, past research and working with clients, SEI Private Wealth Management suggests the following: ›› Build a launching pad for success. Successful families spend time establishing an expectation that the inheritors are accountable to build upon family success and improve the lives of future generations. ›› Talking about values is not the same as talking about wealth. Parents often talk about personal values, but don’t raise issues about financial values. Future generations know they’re affluent but they don’t know how much, where it came from, or the plan to sustain it. Wealthy families must be comfortable with the idea that talking candidly about money is not rude, but necessary, especially if the hope is that the next generation will sustain their legacies and create new wealth. ›› Estate documents only document the legal transaction and don’t go far enough. The most successful families establish a framework to help decide how to educate their heirs about money and when to get them involved in wealth-creation activities. The insights offered by the survey participants highlight the challenges of integrating family dynamics, personal values and financial wealth. More importantly, they declare an urgency to “get it right” and to transfer both personal and financial success to the next generation. A comprehensive wealth transfer strategy or succession plan will help wealthy families get all the issues on the table and ensure their hopes for their families and communities are fully realized. For more information, call 1-888-551-7872 or email SEIPrivateWealth@seic.com to reach a team member. To learn more about SEI Private Wealth Management, please visit www.seic.com/privatewealth
  • 8. 1 Freedom Valley Drive / P.O. Box 1100 / Oaks, PA 19456 1-888-551-7872 seic.com/privatewealth SEI Private Wealth Management provides individuals and families with an innovative approach to wealth management. Our approach starts with knowing our clients. To that end, we have sponsored a series of surveys, peer round-table discussions and other work, all designed to uncover and share the insight of wealthy individuals. The Family Wealth and Succession Survey was conducted in partnership with Scorpio Partnership Limited, an independent research firm. SEI Private Wealth Management, formerly SEI Wealth Network, is an umbrella name for various life and wealth services provided through SEI Investments Management Corporation, a registered investment advisor. ©2011 – 2 0 1 2 S E I 1 2084 3 (09/1 2)